Is The Democratic Republic Of Congo The Next Emerging Economy?

Is The Democratic Republic Of Congo The Next Emerging Economy?

During his last visit to the DRC in March 2015, IMF deputy managing director David Lipton said he was impressed by the country’s economic progress over the past five years. This is fair; despite a difficult security environment, the country has managed to increase its average growth rate from 2.8% in 2009 to 8.7% in 2014, recording the third fastest growth rate in the world this year.

Inflation has decreased from about 50% in 2009 to 1% since 2013, thanks to cautious monetary and budgetary policies. If the country truly is at a turning point, it can finally capitalise on its huge economic potential.

While the country is ranked as the second least developed country in the world, it has the potential to become one of the richest in the continent thanks to its tremendous natural resources: 80 million hectares of arable land, over 1 100 minerals and precious metals, one of Africa’s largest copper reserves, and the world’s leading cobalt producer.

Public investments and robust extractive industries have also stimulated the DRC’s growth. The mining sector, which grew by an average 10.5% from 2010 to 2013 as a result of increased production, is one of the main drivers of the DRC’s growth. The country has also slightly improved its human development index, leading the UNDP to think that it could become an emerging country within 13 years.

The UNDP has also recently hinted that the country could gain more than 10 places in the HDI ranking, if they take into account updated national socio-economic data. It appears that international bodies do not always take into account such data when writing their reports because Congolese statistical institutions have historically transmitted data late and do not make enough efforts to update them.

With an international community pleased by the DRC’s progress, the government is using these positive indicators to validate its policies against its detractors. National authorities finally seem more willing to implement structural and institutional reforms to help the DRC become an emerging country.

In fact, authorities are more and more aware that the Congolese economy is highly vulnerable to external shocks, due largely to the booming mining sector.

Last April, the DRC’s Prime Minister Augustin Matata Ponyo claimed that he wants to boost economic reforms in order to consolidate the country’s economic progress. Among such reforms is the liberalization of the insurance sector and the electricity sector. The government has also reaffirmed its will to improve the business climate and promote good governance.

The DRC has been working with the World Bank since 2010 to improve governance and transparency in extractive industries through measures aimed at consolidating the reforms launched under the Heavily Indebted Poor Countries Initiative. Such measures would also restore the confidence of development partners and private investors.

The reform of the mining code is another measure of the government to boost revenues and better capitalise on its potential. This reform results from the observation that growth in the mining sector has not led to strong revenue mobilisation for the government, as confirmed in the 2014 World Bank report on the DRC’s economic and financial situation.

It appears that mining revenues do not grow as rapidly as mining production, thus causing total government revenues to subside. For example, in 2013, while growth peaked at 8.5% and copper production skyrocketed to 52%, domestic government revenues amounted to only 13% of GDP (14.9% in 2012, 12.5 % in 2011).

Therefore, the reform of the mining code aims at maximizing state revenues. The 2002 mining code was designed to improve the DRC’s economic attractiveness in a post-war context. The current different context thus requires a revised code.

The new version, submitted to Parliament, plans to increase mine royalties, giving significant financial resources to the Treasury, as well as increasing the government’s stake in new mining projects. However, miners have opposed these revisions for months, saying that they would scare away investors.

With depressed copper prices and insufficient electricity reducing the production of some mining groups, changing fiscal terms would send the message that the DRC is an unstable jurisdiction, according to the Federation of Congolese Enterprises. Therefore, miners accuse the government of intending to raise taxes without considering ripple effects.

They take the example of neighbouring Zambia, where companies had to temporarily close their mines because of a recent increase in royalties (the Zambian government has now back-pedaled). Transparency International, which has taken part in talks about the reform, has also recommended a more comprehensive analysis of the realities on the ground in order not to pass the law too quickly.

Given the miners’ strong opposition, the government has said to be “open” to more discussions with miners to find a consensus. These goodwill gestures show the government’s growing determination to work with domestic and international actors to reform its economy.

The mining code controversy underscores the difficulty for DRC to make the most of its economy without discouraging investors with overly high taxes. But, as the World Bank points it out, “better mobilisation of revenues from the natural resources sector would increase fiscal space and give the country the necessary financial means to finance its economic and social development”. Using international aid to help implement reforms for better revenue mobilisation would be one solution.

In any case, foreign investors remain aware of the DRC’s potential. Last February during the Indaba conference, some investors said to be in favour of exploiting the country’s mining sector and waiting for the new code to be revised. As the government seems willing to appease miners, it is likely a consensus will be reached.

Given the country’s economic progress and the government’s strategy to encourage investments in large infrastructure projects, the DRC’s attractiveness to investors is likely to keep growing. But goodwill gestures are not enough if the government does not turn them into significant actions.

This Article first appears on Global Risk Insights. It was written by Djenabou Cisse, a political analyst at G-NOVA